1.

If the market rate is greater than the coupon rate, the bond will trade below par (at a discount). 2. Bond issue costs are capitalized as a deferred charge and amortized to expense over the life of the bond issue ------ True 4 A company issues $5,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2010. Interest is paid on June 30 and December 31. The proceeds from the bonds are $4,901,036. Using effective-interest amortization, what will the carrying value of the bonds be on the December 31, 2010 balance sheet? A) $4,903,160 B) $5,000,000 C) $4,906,281 D) $4,902,077 A) $4,903,160 $4,901,036 + [($4,901,036 .04) $195,000] + [($4,902,077 .04) $195,000] = $4,903,160 Or

. A company issues $20,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2007. Interest is paid on June 30 and December 31. The proceeds from the bonds are $19,604,145. Using effective-interest amortization, how much interest expense will be recognized in 2007? A) $780,000 B) $1,560,000 C) $1,568,498 D) $1,568,332 http://brainmass.com/business/accounting-business-analysis-financial-reporting/385 328 5. A $600,000 bond was retired at 103 when the carrying value of the bond was $622,000. The entry to record the retirement would include a Bonds payable 600000 Discount on BDS pay 22000

Gain on bond redeem 4000 Cash 618000 Or 68 Lahey Corporation retires its $500,000 face value bonds at 105 on January 1, following the payment of annual interest. The carrying value of the bonds at the redemption date is $518,725. The entry to record the redemption will include a A)credit of $18,725 to Loss on Bond Redemption. B)debit of $18,725 to Premium on Bonds Payable. C)credit of $6,275 to Gain on Bond Redemption. D)debit of $25,000 to Premium on Bonds Payable. Or 9. Gester Corporation retires its $100,000 face value bonds at 105 on January 1, following the payment of semiannual interest. The carrying value of the bonds at the redemption date is $103,745. The entry to record the redemption will include a: A. credit of $3,745 to Loss on Bond Redemption. B. debit of $3,745 to Premium on Bonds Payable. C. credit of $1,255 to Gain on Bond Redemption. D. debit of $5,000 to Premium on Bonds Payable.

6. On January 2010, Smith Company sold property to Tanner Company which originally cost Smith $500,000. There was no established exchange price for this property. Tanner gave Smith a $900,000 zero-interest-bearing note payable in three equal annual installments of $300,000 with the first payment due December 31, 2010. The note has no ready market. The prevailing rate of interest for a note of this type is 9%. The present value of a $900,000 note payable in three equal annual installments of $300,000 at a 9% rate of interest is $759,388. a. What is the amount of interest income that should be recognized by Smith in 2010, using the effective interest method?

b. What should be the balance of the Discount on Notes Payable account on the books of Tanner at December 31, 2010 after adjusting entries are made, assuming that the effective interest method is used? A) Using illustration 14-12 pg 705, Year 1 interest expense would be present value of 759,388 x 9% to get $68,344.92, and it would seem year 2 would be 74,495.96, which would be 827,732.92 x .09.

7-9 Use the following to answer questions 4-6: On January 1, 2007, Bleeker Co. issued eight-year bonds with a face value of $1,000,000 and a stated interest rate of 6%, payable semiannually on June 30 and December 31. The bonds were sold to yield 8%. Table values are: Present value of 1 for 8 periods at 6% .627 Present value of 1 for 8 periods at 8% .540 Present value of 1 for 16 periods at 3% .623 Present value of 1 for 16 periods at 4% .534 Present value of annuity for 8 periods at 6% 6.210 Present value of annuity for 8 periods at 8% 5.747 Present value of annuity for 16 periods at 3% 12.561 Present value of annuity for 16 periods at 4% 11.652

4. The present value of the principal is A) $534,000. B) $540,000. C) $623,000. D) $627,000. 5. The present value of the interest is A) B) C) D) $344,820. $349,560. $372,600. $376,830.

6. The issue price of the bonds is A) B) C) D) Or $883,560. $884,820. $889,560. $999,600.

On January 1, 2010, Cobble Inc issued eight-year bonds with a face value of $800,000 and a stated rate of 6%, payable annually on December 31. The bonds were sold to yield 8%. Table values are: Present value of 1 for 8 periods at 6% = .627 Present value of 1 for 8 periods at 8% = .540 Present value of 1 for 16 periods at 3% = .623 Present value of 1 for 16 periods at 4% = .534 Present value of annuity for 8 periods at 6% = 6.210 Present value of annuity for 8 periods at 8% = 5.747 Present value of annuity for 16 periods at 3% = 12.561 Present value of annuity for 16 periods at 4% = 11.652 a. The present value of the principal is how much? b. The present value of the interest is how much? c. What is the issuance price of the bond? d. How would hte present value of the principal change if interest was paid semiannually? 1. Calculations with Annual Interest Payments: Face value=$800,000 Stated rate=0.06 Market rate=0.08 Term=8 years (8 periods)

Factors: PV $1 (n=8, r=8%); discount factor =0.54 PV Annuity (n=8,r=8%); discount factor =5.747 PV of principal [$800,000*0.54(PV of $1, 8 periods, 8%)]......... ........................$432,000 PV of interest [$800,000*0.06*(12/12)*5.747 (PV of annuity, 8 periods, 8%)] .....................$275,856 Selling Price of Bond ($432,000+$$275,856)..............$707,856 Discount ($800,000-selling price) ..........................$92,144 Hence answers are: a. PV of principal......................$432,000 b. PV of interest........................$275,856 c. Issuance price of bond ..........$707,856 2. Calculations with Semi-annual Interest Payments: Face value=$800,000 Stated rate=0.06 Market rate=0.08 Term=8 years (8*2=16 periods) Factors: PV $1 (n=16, r=4%); discount factor =0.534 PV Annuity (n=16,r=4%); discount factor =11.652 PV of principal [$800,000*0.534(PV of $1, 16 periods, 4%)]......... ........................$427,200 PV of interest [$800,000*0.06*(6/12)*11.652 (PV of annuity, 16 periods, 4%)] .....................$559,296 Selling Price of Bond ($4327,200+$$559,296)..............$986,496

Premium (Selling price-$800,000) ..........................$186,496 Hence answers are: a. PV of principal......................$427,200 b. PV of interest........................$559,296 c. Issuance price of bond ..........$986,496 Answer for this part: If the interest was paid semiannually, the PV of the principal would be $427,200 which means the principal reduces in value by $4,800 to $427,200. And a premium of $186,496 results. Other answers change as indicated above, with semi-annual interest payments. Or

3. On January 1, 2012, Ellison Co. issued eight-year bonds with a face value of $2,000,000 and a stated interest rate of 6%, payable semiannually on June 30 and December 31. The bonds were sold to yield 8%. Table values are: Present value of 1 for 8 periods at 6% Present value of 1 for 8 periods at 8% Present value of 1 for 16 periods at 3% Present value of 1 for 16 periods at 4% Present value of annuity for 8 periods at 6% Present value of annuity for 8 periods at 8% Present value of annuity for 16 periods at 3% Present value of annuity for 16 periods at 4% .627 .540 .623 .534 6.210 5.747 12.561 11.652

The issue price of the bonds is A) B) C) D) $1,767,120. $1,769,640. $1,779,120. $1,999,200.

Interest = $2,000,000 * 3% per interest period = $60,000 $2,000,000 * PV 16, 4% (0.534) = $1,068,000 + $60,000 * PVOA 16, 4% (11.652) = $1,767,120 699,120

25. 11. declared a 5% stock dividend on its10,000 issued and outstanding 15 2. Lang Co. issued bonds with detachable common stock warrants. Only the warrants had a known market value. The sum of the fair value of the warrants and the face amount of the bonds exceeds the cash proceeds. This excess is reported as
a. Discount on Bonds Payable. b. Premium on Bonds Payable. c. Common Stock Subscribed. d. Paid-in Capital in Excess of ParStock Warrants. 2. a Conceptual.

16

3. On January 1, 2010, Sharp Corp. granted an employee an option to purchase 6,000 shares of Sharp's $5 par value common stock at $20 per share. The Black-Scholes option pricing model determines total compensation expense to be $140,000. The option became exercisable on December 31, 2011, after the employee completed two years of service. The market prices of Sharp's stock were as follows: January 1, 2010 December 31, 2011 $30 50

For 2011, should recognize compensation expense under the fair value method of
a. $90,000. b. $30,000. c. $70,000. d. $0.

$140,000 2 = $70,000.

Bond issue costs are capitalized as a deferred charge and amortized to expense over

the life of the bond issue ------ True

19. Qu 19/16-7 Corp has number1000 of common share outstanding Dec 2010, additional amount100 of shares issued April 1 2011 and more shares 200 on September 1. on October 1st company issues 9% convertible bond at a price30000. Each 1000 bond is convertible into 20 shares of common stock, no bonds have been converted the number of share to be issued to compute basic earnings per share and diluted per share on December 31 is? $1142/$1292 BOOK P16-18 a. b.30000100 x20=600 (100x9/12) 1142+600x3/12=1292 (200x4/12) 67 1142 75 1000

21-22 Use the following information for questions 124 and 125. Information concerning the capital structure of Piper Corporation is as follows: December 31, 2013 2012 Common stock 150,000 shares 150,000 shares Convertible preferred stock 15,000 shares 15,000 shares 6% convertible bonds $2,400,000 $2,400,000 During 2013, Piper paid dividends of $0.80 per share on its common stock and $2.00 per share on its preferred stock. The preferred stock is convertible into 30,000 shares of common stock. The 6% convertible bonds are convertible into 75,000 shares of common stock. The net income for the year ended December 31, 2013, was $400,000. Assume that the income tax rate was 30%. 124. What should be the basic earnings per share for the year ended December 31, 2013, rounded to the nearest penny?
a. $1.77 b. $1.95 c. $2.47

d. $2.67

125. What should be the diluted earnings per share for the year ended December 31, 2013, rounded to the nearest penny?
a. $2.13 b. $1.96 c. $1.89 d. $1.57

22-24
Rich, Inc. acquired 30% of Doane Corp.'s voting stock on January 1, 2010 for $400,000. During 2010, Doane earned $160,000 and paid dividends of $100,000. Rich's 30% interest in Doane gives Rich the ability to exercise significant influence over Doane's operating and financial policies. During 2011, Doane earned $200,000 and paid dividends of $60,000 on April 1 and $60,000 on October 1. On July 1, 2011, Rich sold half of its stock in Doane for $264,000 cash. Before income taxes, what amount should Rich include in its 2010 income statement as a result of the investment? a. $160,000. b. $100,000. c. $48,000. d. $30,000. c $160,000 30% = $48,000. The carrying amount of this investment in Rich's December 31, 2010 balance sheet should be a. $400,000. b. $418,000. c. $448,000. d. $460,000. b $400,000 + $48,000 ($100,000 30%) = $418,000. What should be the gain on sale of this investment in Rich's 2011 income statement? a. $64,000. b. $55,000. c. $49,000. d. $40,000 $418,000 ($60,000 30%) + ($200,000 50% 30%) = $430,000.

27 11. Dublin Co. holds a 30% stake in Club Co. which was purchased in 2011 at a cost of $3,000,000. After applying the equity method, the Investment in Club Co. account has a balance of $3,040,000. At December 31, 2011 the fair value of the investment is $3,120,000. Which of the following values is acceptable for Dublin to use in its balance sheet at December 31, 2011? I. $3,000,000 II. $3,040,000 III. $3,120,000 A) I, II, or III. B) I or II only. C) II only. D) II or III only. 28. On October 1, 2010, Wenn Co. purchased 600 of the $1,000 face value, 8% bonds of Loy, Inc., for $702,000, including accrued interest of $12,000. The bonds, which mature on January 1, 2017, pay interest semiannually on January 1 and July 1. Wenn used the straight-line method of amortization and appropriately recorded the bonds as available-for-sale. On Wenn's December 31, 2011 balance sheet, the carrying value of the bonds is
a. $690,000. b. $684,000. c. $681,600. d. $672,000.

702,000-12000-(600*1000)= 90,000 90,000/75 * 15 = 18,000 702,000-12,000-18,000=672,000